Out Of Court Payment Agreement (XII): Validity of payments made in connection with an Out Of Court Payment Agreement and clawback action in a consecutive insolvency proceeding

Where an order for a consecutive insolvency proceeding is made as a result of the rendering void or breach of an Out of Court Payment Agreement, the debtor may have already made some of the payments covenanted in the payment plan associated with the agreement.

Both the rendering void of the Out of Court Payment Agreement and the declaration of a breach of the agreement must entail the disappearance of the novating effects of the agreement, and the creditors must take part in the consecutive insolvency proceeding with their claims in the amount and form they had before the agreement existed.

Most legal writers, however, together with the commercial judges practicing in Madrid –in the judges’ conclusions drawn up on October 11, 2013-, share the view that any payments made in compliance with the agreement up until the date on which it has been rendered void or declared to have been breached will be deemed validly made, unless in the consecutive insolvency proceeding it is proposed to claw them back under article 71 of the Insolvency Law. This is in keeping with the spirit of the Insolvency Law in relation to payments made in partial compliance with an arrangement when the liquidation phase is commenced later on.

The specific provision in relation to clawback action in consecutive insolvency proceedings is that the two-year time period for determining the transactions that may be clawed back starts to run from the debtor’s application for the commencement of the Out of Court Payment Agreement proceeding. But when is that time period deemed to end?

The suspicion period for clawback action will not end –according to the commercial judges practicing in Madrid and the prevailing legal commentary and analysis- until the order for a consecutive insolvency proceeding, and therefore any transactions performed by the debtor during the insolvency mediation proceeding may be examined in light of the rules on clawback action. The truth is that those transactions are not subject to any type of intervention by the insolvency mediator –since this is not his role -, and the debtor’s powers of management and disposal remain intact during the Out of Court Payment Agreement proceeding.

The Out of Court Payment Agreement itself cannot be clawed back in any subsequent insolvency proceeding. What could be clawed back in a consecutive insolvency proceeding, however, are any payments made in compliance with that out of court agreement because, although supervised by the insolvency mediator, they have not been examined by any authority or authorized by a court and would fall within the time period for clawback action. It could be argued in those cases though that there is justification for the trade-off in assets that the payment would entail, in performance of the agreement reached with the majority of the creditors.

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